Latest Insights from the Organizations and Social Change Research Group at the UMass Boston Department of Management and Marketing

Menu

Don’t Listen to Economists

By Julie A. Nelson.

According to a recent New York Times article, the Primark retailing group, based in the UK and Ireland, is stepping up to the plate to aid the families of the killed and injured in last year’s Tazreen Fashion factory fire in Bangladesh. The company claims to have already delivered $3.2 million in assistance, and a spokesperson says simply “you take responsibility for the results of where your clothes are being made.” Meanwhile, however, WalMart, Sears, and other U.S. companies that were also supplied by the factory have declined to contribute to efforts to aid the victims. What gives?

Here’s one plausible, easy explanation, favored by many: Primark happens to believe that engaging in this is a public relations move that will ultimately raise its profits, while the U.S. companies have made the same calculation and decided that, for them, it wouldn’t be a profit maximizing move. The companies are all predictably obeying the dictates of global capitalism.

But what is plausible and easy may not true. Let’s take a second look.

Academic economics has long bamboozled intellectuals and activists—from across the political spectrum—into adopting narrow ways of thinking about business and commerce. Mainstream economic theory claims that in economic life, people are driven by self-interest. Firms have no choice but to maximize profits. Individuals maximize satisfaction from consumption. Milton Friedman famously said that the responsibility of a company is simply “to make as much money for their stockholders as possible.” Building on this image of the machine-like economy, neoliberal thinkers treat the ideal of the competitive market as the summum bonum (or supreme good).

Karl Marx and his followers envision a revolutionary displacement of the capitalist system by an alternative economy of solidarity. Yet Marx also drew his inspiration from Adam Smith. Marxist economists portray capitalist economies as populated by firms that are driven to extract the last possible dollar of profit. People are duped by the marketers of consumer products, and workers are alienated from their humanity by their role in the economic machine. The foundations of community are seen as corrupted by inhuman exchange relations and by the invidious, society-destroying power of money. So now the capitalist economy is the summum malum (or supreme evil)instead.

Note, however, that both neoliberals and Marxist critics tend to believe that market economies are essentially machines – entities that are fundamentally separated from society and human emotions, and from ethics and interdependence. Both reject any talk of corporate ethics—the former because it is not needed; the latter because it is mere PR or ineffective reformism.

What’s wrong with this picture?

Take, for example, the belief that firms must maximize profit. One might think that economists discovered this belief by studying businesses, but in fact they invented it. It’s a convenient assumption because it turns the analysis of firms’ behavior into a simple calculus problem, and that satisfies economists’ desire for physics-like regularities. But profit maximization isn’t actually legally mandated. Nor is it an inevitable result of competition. If anything, life here is imitating fiction, since business leaders and investors increasingly appear to believe that maximizing profits (read greed) is not only permissible but required.

This is the problem with the mechanistic image of the economy: it denies the moral agency of people working within it. Yet, in the real world, markets and corporations don’t run coolly and objectively. Instead, they are rife with human emotions such as care, desire and revenge. They rely on the creation of beliefs about the future, run on human ties of trust, and are built on legal institutions and social norms. If we put aside the distorting lenses provided by dominant economic theories, it’s obvious that businesses pursue a variety of goals alongside returning a profit to their shareholders. These goals can be either socially helpful (like Primark’s, in the Tazreen case) or socially harmful (like expanding executive compensation to absurd levels).

Economies have been imagined in macho terms of machines, control, and the aggressive pursuit of profit for so long that it can be difficult to think otherwise. Emotions, care, and interdependence have been imagined as only belonging to a more feminine sphere, so pointing out their relevance for commerce risks provoking accusations of naiveté. The reaction against recognizing human interdependence, however, simply illustrates the degree to which sexism is a force in intellectual realms, as well as in social and political ones.

The old mechanistic thinking gives current corporations an ethical free pass by providing them with the excuse that “the system made me do it.” But we can and must expect much better of them, and let them know it.

Society should applaud the Primarks of the business world. Why did Primark step up, when other businesses have not? It could be something about their corporate leadership. It could be that European consumers and/or governments exert more pressure on them, than is the case in the United States. It is likely to be some of both. What is highly unlikely, though, is that their actions are simply the result of a cool profit-making calculus. Projecting what will best elevate profits is, at best, more of an art than a science anyway—who really knows what the future will hold? In light of fundamental interdependencies and uncertainties, it is inevitable that beliefs, norms, hopes, and fears will be called on to fill in for missing information.

We should—in every way we can—also call the Walmarts of the business world to account. This is neither a neoliberal nor a Marxist approach: It’s a pragmatic approach, that simply declines to confuse the outcome of the economics profession’s “physics envy” with fact.

3 thoughts on “Don’t Listen to Economists”

This is an interesting article, especially as in several classes here in the UMass MBA program, I have been taught that the purpose of a company is to increase shareholder value, since shareholders own the company. Although we are also taught that this view is put forth for the purpose of aligning managers’ interests with those of the company, there hasn’t been much examination of whether this view is actually true.
Prof. Kiran Verma in AF617 raises the point that some ways of measuring performance exist because they are easily implemented. Financial measures such as earnings per share or ROI require little additional cost to acquire because they often already exist in the accounting or other systems. Non-financial measures, such as customer satisfaction or time to complete a task, can be more complicated and expensive. Similarly in nonprofits, for many organizations it is much easier to measure how many blankets or cups of coffee you distributed to those on the streets, and much more difficult to measure what sort of impact you made, if any, on a person’s life, much less if you have helped them make progress on the long journey back to being housed and stable. Capturing interdepencies — such as how your services interrelate with those of clinics, job training programs, churches, AA, or counseling — is impossible.
It may also be that the accelerated pace of 21st Century life makes it difficult for us to slow down enough for complex thinking. An article by Prof. Ashish K. Jha in WBUR’s Cognoscenti notes how hospitals are spending tens of millions of dollars upgrading their amenities (nail salons, concert pianists in the lobby), but relatively little on, say, reducing deaths by medical errors. The reason points to misaligned incentives: patients are attracted to hospitals with fancy facilities, and insurance companies have trouble retaining customers if they don’t include the popular hospitals in their networks, which in turn gives the fanciest hospitals more bargaining power. There is a lot more that can be said about healthcare, but the (simplified) point is that while we all desire fewer deaths by medical error, when we decide where to go, we prioritize amenities. Similarly, I think it is admirable for Primark to provide funds for the victims of the Rana Plaza collapse and the Tazreen factory fire. But how much better it would have been had Primark took on the additional costs of ensuring safe conditions and living wages for Bangladeshi workers from the start? I look forward to the press release of Primark’s changing how they source garments and to hearing how much of the funding actually got to the victims.

Very interesting and thought provoking article. It is so easy to just blame large corporations and say “all they care about is maximizing profits”. Yes, this is probably a very strong and legitimate goal but one must also consider that like you said, there are other factors involved in decision making. We must give credit where credit is due and if Primark is taking this step to help, then good for them.

Professor Nelson, thank you for bringing together an often fragmented lot of information into one brief and cohesive post for readers to reflect on. Maximizing profits does a good job of maximizing profits, but perhaps we can move beyond this normative value structure as the only legitimate reason to harness our human potential for creativity, and yes even productivity. Though equality may not be the necessary remedy, some generally agreeable level of sufficiency could go a long way in amending the obvious hurt that is churned out by much of our collective business activity. The “nature” of doing business still leaves factory workers killed and marginalized. Changing the “nature” of business may require, as you have suggested, not only taking action as Primark has done but in changing deeply ingrained beliefs and expectations about private organizations and the role they play in all our lives.